I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

The Subprime Crash Was Caused By The Schools Not The Banks

That’s one way of reading this report about how it was poor math skills that led to the mortgage implosion. That it was the schools and their inability to teach people basic skills that caused our problems, not the mass mania in the financial system where all thought that real estate prices could only ever go up.

People with poor maths skills are more likely to be behind with their mortgage payments and have their home repossessed, according to a study.

It shows the risk of defaulting on a mortgage is directly linked to a home owner’s maths skills and could explain the mortgage defaults in the recent global crisis.

I have to admit that when I initially saw that in that English newspaper I thought that someone in the finance industry has financed a very interesting study there. One that absolves their own industry, most fortunately, from any blame and manages to shift it onto the teaching unions. For of course everyone does indeed have to go to school and the quality of teaching in the K-12 system is clearly going to be at least influenced by who we actually have as the teachers. And if they’re not able to teach people to count after 12 years then that probably is something we can blame them for.

It wasn’t until I saw the same report mentioned in the WSJ that I realised that this report was both serious and from a serious source.

Moreover, the economists observed no significant connection between borrowers with weak math skills and a specific type of loan. “We find that poor numerical ability is correlated across the board for all types of mortgages,” said Mr. Goette, one of the study’s authors, in a phone interview. “That means restricting the types of mortgages won’t solve the problem. Even if we let people buy fixed rate mortgages, there would still be defaults.”

As I say, it’s a serious study from a serious source. The Proceedings of the National Academy of Sciences, PNAS, is indeed a serious source. The questions weren’t what you might call difficult:

The questions involved calculating percentages and the basics of compound interest – the idea that the lump sum on which the interest is calculated changes each year.

Professor Goette said: “It’s quite surprising how many people get these wrong.”

Borrowers who did least well at the maths test spent about 25 per cent of the time in arrears on their mortgage payments compared with only 12 per cent for the top group.

The take out lesson from this, for me at least, is that we’ve got a rather complex problem here. Financial market innovation I regard as a good thing, just as I regard almost all forms of innovation as a good thing. But we do seem to have some significant part of the population that simply is not equipped to be able to deal with the products of that innovation. Some might argue that the complex products should therefore not be on sale to anyone: but why should we deny the benefits to those who can use and understand the new products?

We actually have an example of how we handle this in other parts of the financial markets. We have the concept of “sophisticated investor” for example, who is allowed to take much more risk than the normal common or garden one. So perhaps we need to have some sort of classification like that? “Numerate investor ” and innumerate for example? The problem with that being there’s absolutely no one out there at all who would be happy to be put into that second group.

The actual study itself seems to recommend better teaching of financial matters in high school. Which I’m sure would help at the margin. But given the basic financial illiteracy that we all see every day (it’s something of a sport to find such errors in one of the leftward leaning UK newspapers for example) I have a feeling that it’s a deeper problem than that. And I’m not sure that I can see a solution given that we don’t want to ban something just because some people cannot understand it. For that “ some” means that others can and they should be allowed to use the product if they wish.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.